Business Development Bank of Canada v. 2598009 Ontario Inc. and Byung Wook Lee
2022 ONSC 4147
COURT FILE NO.: CV-21-4070
DATE: 20220714
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: Business Development Bank of Canada, Plaintiff
AND:
2598009 Ontario Inc. and Byung Wook Lee, Defendants
BEFORE: Justice C. Boswell
COUNSEL: Benjamin Frydenberg for the Plaintiff
Byung Wook Lee in person
HEARD: July 13, 2022 by Zoom Videoconference
ENDORSEMENT
[1] This case is one of a number of matters that have recently come before the court where a borrower, pleading the doctrine of frustration, seeks relief from repayment of a commercial loan due to the profound and unexpected economic impact of the COVID-19 pandemic. Like other cases before this one, I conclude that the COVID-19 pandemic was generally not a sufficient intervening event to frustrate the terms of a commercial lending agreement.
Overview
[2] The plaintiff loaned the numbered company defendant (“259’) $200,000 in February 2018 and a further $70,000 in March 2019. The individual defendant, Mr. Lee, guaranteed the repayment of both loans.
[3] Mr. Lee is the principal of 259, which operates a restaurant called “Teriyaki Experience” in the Eaton Centre in Toronto. The 2018 loan was used by 259 to acquire the business, while the 2019 loan was advanced to provide what the loan agreement describes as “liquidity for growth”.
[4] Teriyaki Experience was impacted significantly by the effects of the COVID-19 pandemic and, more specifically, lock-down rules that affected the ability of restauranteurs (amongst others) to operate. It went into default under the loans. BDC has advanced claims against both 259 and Mr. Lee personally for repayment of the outstanding balance.
[5] There is no dispute that the loans were advanced or that Mr. Lee guaranteed them. There appears to be no dispute that the outstanding balance on the 2018 loan was $150,612.98 as of November 7, 2021 and $71,472.91 on the 2019 loan as at that same date. Both loans accrue interest at BDC’s floating base rate of interest plus 3.67% per annum, compounded monthly.
[6] What is in dispute is whether the COVID-19 pandemic frustrated the parties’ loan agreements and whether the defendants are entitled to relief, in whole or in part, of their obligation to repay the loans as a result of the pandemic’s impact.
[7] BDC argues that the frustration argument has no traction and it moves for summary judgment. For the brief reasons that follow, I agree.
The Governing Legal Principles
A. Summary Judgment
[8] I need not take a deep dive into the principles that control motions for summary judgment. They are well-known and not in dispute.
[9] Summary judgment is a procedure available to litigants as a means to determine a dispute without the need of what some jurists have referred to as “the full machinery of a trial”.
[10] The specific mechanism is found at Rules 20.04(2) and (2.1) of the Rules of Civil Procedure, which provide as follows:
(2) The court shall grant summary judgment if,
(a) the court is satisfied that there is no genuine issue requiring a trial with respect to a claim or defence; or
(b) the parties agree to have all or part of the claim determined by a summary judgment and the court is satisfied that it is appropriate to grant summary judgment.
(2.1) In determining under clause (2) (a) whether there is a genuine issue requiring a trial, the court shall consider the evidence submitted by the parties and, if the determination is being made by a judge, the judge may exercise any of the following powers for the purpose, unless it is in the interest of justice for such powers to be exercised only at a trial:
Weighing the evidence.
Evaluating the credibility of a deponent.
Drawing any reasonable inference from the evidence.
[11] In its seminal decision in Hryniak v. Mauldin, 2014 SCC 7, the Supreme Court described the summary judgment procedure as a significant alternative model of adjudication. The court identified the circumstances where there will be no genuine issue requiring a trial, instructing, at para. 49:
There will be no genuine issue requiring a trial when the judge is able to reach a fair and just determination on the merits on a motion for summary judgment. This will be the case when the process (1) allows the judge to make the necessary findings of fact, (2) allows the judge to apply the law to the facts, and (3) is a proportionate, more expeditious and less expensive means to achieve a just result.
[12] The summary judgment rule has been available, in one iteration or another, for decades. A significant body of jurisprudence has developed in relation to the rule. The following principles, amongst others have emerged and continue to apply:
(a) The moving party continues to bear the legal and persuasive burden to establish that there is no genuine issue requiring a trial to resolve;
(b) The responding party continues to bear an evidentiary burden to establish that there is a genuine issue requiring a trial;
(c) Each party must “put their best foot forward”. Neither may rest on the allegations in their pleadings; and,
(d) The court is entitled to assume that the record before it contains the core substance of the evidence that the parties will present at trial.
See Dawson v. Rexcraft Storage & Warehouse Inc., 1998 CanLII 4831 (ON CA), [1998] O.J. No. 3240 (C.A.) at para. 17; Sweda Farms Ltd. v. Egg Farmers of Ontario, 2014 ONSC 1200 at paras. 26 and 32; and Penretail Management Ltd. v. 2380462 Ontario Inc. (o/a Bolton Health Centre), 2016 ONSC 600, at para. 10.
B. Frustration
[13] In this instance, the central issue in dispute is whether the COVID-19 pandemic frustrated the parties’ lending agreement.
[14] Frustration is a well-known, if not entirely settled, doctrine of contract law. In the 7th edition of his widely-cited text, The Law of Contracts, Toronto: Thomson Reuters Canada Inc, 2017, Professor Waddams opines that the fundamental question in frustration cases is why does the court intervene to grant relief? In his view, the answer is that courts will intervene when “the occurrence of the unexpected event is so much outside the range of risks that the agreement allocates – so fundamental a piece of the framework within which the bargain was struck has dropped out – that the values favouring enforcement are outweighed.” (¶368).
[15] The Supreme Court has expressed a similar view of the doctrine of frustration, observing that it “occurs when a situation has arisen for which the parties made no provision in the contract and performance of the contract becomes ‘a thing radically different from that which was undertaken by the contract’”. See Naylor Group Inc. v. Ellis-Don Construction Ltd., 2001 SCC 58, at para. 53.
[16] To illustrate the doctrine of frustration in action, Professor Waddams cites examples where relief from contractual performance has been granted on the basis of frustration due to intervening events, including:
• An agreement to charter an aircraft where the aircraft was destroyed. See McDonald Aviation Co. v. Queen Charlotte Airlines Ltd., 1951 CanLII 259 (BC CA), [1952] 1 D.L.R. 291 (B.C.C.A.);
• An agreement to rent a hall where the hall burnt down. See Taylor v. Caldwell (1863), 122 E.R. 309;
• An agreement to sell a crop where the crop fails. See Rinn v. Parent Seeds Ltd., 2001 MBCA 90, [2001], 156 Man. R. 191 (Man. C.A.); and,
• An agreement to perform personal services, where the promisor dies. See McBride v. Johnson (1962), 1962 CanLII 52 (SCC), 31 D.L.R. (2d) 763 (S.C.C.).
[17] He cites other cases where relief has not been granted, including:
• The lessee of a neon sign being bound to pay rent even though blackout regulations prohibited illumination of the sign. See Claude Neon General Advertising Ltd. v. Sing, 1941 CanLII 292 (NS SC), [1942] 1 D.L.R. 26 (N.S.S.C.); and,
• The lessee of a hotel being bound to pay rent even though prohibition made the sale of liquor illegal. See Charrier v. McCreight (1917), 1917 CanLII 370 (AB CA), 33 D.L.R. 689 (Alta. S.C. App. Div.).
The Evidentiary Record
[18] The evidentiary record is relatively thin. BDC filed an affidavit of one of its senior account managers. Attached to the affidavit as exhibits were the relevant loan agreements and the guarantees. A balance of account was set out in the body of the affidavit.
[19] BDC’s motion record was served in February 2022 for a motion date of July 13, 2022. Despite having five months to prepare responding materials, the defendants appeared on the motion without having filed an affidavit and only just having delivered a factum.
[20] Mr. Lee asked to give oral evidence on the motion. In particular, he asked only to testify that the contents of the statement of defence are factually true. I permitted him to do so on the basis that I could see no prejudice to the plaintiff in allowing it.
[21] The statement of defence includes the following assertions:
• A pandemic was declared by the World Health Organization on March 11, 2020. In response, both provincial and federal levels of government implemented unprecedented restrictions on personal and economic activities;
• The Prime Minister of Canada stated publicly, at the outset of the pandemic that his government “had our backs”;
• Over the course of the pandemic, the defendants’ business was closed for 10 months. Even when it was permitted to re-open, revenues were less than 25% of pre-COVID levels; and,
• The economic consequences of the pandemic continue.
[22] The defendants also note that BDC is a government agency.
Analysis
[23] The sole contested issue in this case is whether the lending agreements were frustrated by the impact of the COVID-19 pandemic. For the following brief reasons, I conclude that they were not.
[24] The lending contracts in issue were commercial agreements between a lender and a borrower. That the lender may happen to be a government agency is not, in my view, germane. BDC’s role in this instance was as a commercial lender. There is no suggestion, nor could there be, that BDC somehow partnered with the defendants in their business venture. They advanced loans to 259 on specific repayment terms.
[25] One of BDC’s aspirations is to promote and support entrepreneurialism in Canada. That aspiration does not diminish their position as a commercial entity, nor does it compel them to act in the best interests of their borrowers to their own detriment.
[26] It was, of course, hoped by both sides that 259’s business would prosper. The more successful the business, the greater the likelihood of repayment. But that hope was not entirely naïve. Conditions were built into the loan agreements for enforcement in the event of default. The personal guarantees of Mr. Lee were required as security for the lender in the event 259 defaulted.
[27] Restaurants are notoriously difficult to run and profit from. They fail regularly due to a variety of factors including changing economic conditions. It was undoubtedly in the parties’ mutual contemplation that changing economic conditions may impact on the ability of 259 to repay the loan. No provision was made for relief due to any such change in the economy.
[28] I accept that the economic impact of the COVID-19 pandemic was a substantial negative force on the economy. But I do not accept that it made performance of the contract radically different from what was contemplated by the parties. It simply made it more difficult for the defendants to meet their obligations under the lending agreements.
[29] Arguments similar to that advanced by the defendants here have already been made – and rejected – in a number of Ontario cases, including the following:
(a) Sub-Prime Mortgage Corporation v. Kaweesa, 2021 ONSC 739, where the defendants argued that minutes of settlement in a mortgage action were frustrated because the impact of the COVID-10 pandemic impaired their ability to obtain alternate financing. Stinson J. found that the defendants knew of the existence of the pandemic and its impact when they signed the minutes in November 2021. Moreover, the impact of the pandemic would not have forced the defendants to do something “radically different” from what they had contracted to do. Their obligation was to pay a specified sum on a specified date. The pandemic did not alter that obligation.
(b) Bank of Montreal v. 2643612 Ontario Ltd., 2021 ONSC 4401, where the plaintiff bank moved for summary judgment in an action to collect on a delinquent loan and guarantee. The facts are similar to those in the case at bar. The numbered company operated a restaurant in Stoney Creek, Ontario. It obtained a small business loan from the plaintiff which was guaranteed by its principal. It maintained the loan in good standing until COVID-19 hit, after which the loan went into default. Amongst other arguments, the defendants advanced a defence of frustration. That argument was rejected by Vermette J. who held, at paras. 17-19:
[17] The pandemic and the ensuing lockdowns did not render the Loan Agreement and the related agreements substantially different from the agreements that the parties executed in November 2018. In exchange for specified actions by the Bank, including granting the Loan, the obligation of 264 was to make specific payments on specified dates and Ms. Griffiths’ obligation under the Guarantee was to guarantee payment to the Bank of all of 264’s debts and liabilities. The pandemic and the lockdowns did not alter these obligations and did not make them “radically different” from what the parties had agreed to do: Sub-Prime Mortgage Corporation v. Kaweesa, 2021 ONSC 739 at para. 28; Sub-Prime Mortgage Corporation v. Kaweesa, 2021 ONCA 215 at para. 26.
[18] The parties’ contractual obligations are not contingent on 264 operating its restaurant/bar. Further, the Loan Agreement and related agreements do not specify how the Loan is to be repaid, or that it must be repaid from funds earned from the operation of 264’s restaurant/bar. The fundamental nature of the agreement between the parties was the lending of a sum of money upon certain terms, including a personal guarantee on a portion of the Loan, in return for which repayment was required. While COVID-19 and pandemic-related measures have undoubtedly made the Defendants’ obligations much more difficult to meet, they have not changed the nature of these obligations: Royal Bank of Canada v. 974585 Canada Corp., 2021 ONSC 2908 at paras. 17-19. Further, the pandemic-related measures do not constitute a permanent disruption: Cowie v. Great Blue Heron Charity Casino, [2011] O.J. No. 5573 at para. 23 (Div. Ct.). In light of the foregoing, the doctrine of frustration does not apply.
[19] While the parties could not have contemplated the COVID-19 pandemic in November 2018, this is neither here nor there because the fact that the parties’ contractual obligations have not been rendered radically different from the obligations that they originally agreed to is sufficient to dispose of the frustration argument: see Sub-Prime Mortgage Corporation v. Kaweesa, 2021 ONCA 215 at para. 26.
(c) RBC v. 974585 Canada Corp. et. al., 2021 ONSC 2908, which again is similar to the facts in the case at bar. The plaintiff advanced a loan to the defendant to assist with the construction of a film studio. The loan went into default in October 2020. The plaintiff sued and moved for summary judgment. The defendants advanced a frustration defence. That defence was rejected by McCarthy J., who relied on Stinson J.’s reasoning in Sub-Prime in support of his conclusion. He held, at para. 19 as follows:
There is nothing about the Covid-19 pandemic which altered the fundamental nature of the contract at bar; the agreement was nothing more than the lending of a sum of money upon certain terms, including personal guarantees on a portion of the loan, in return for which repayment was required. In the case of a default under the loan, the lender had a right to demand and seek payment, and to look to the guarantors for a portion of that payment.
[30] Mr. Lee argued that the Sub-Prime case is distinguishable on its facts from the case at bar as well as the Bank of Montreal and RBC cases cited above. In particular, the contract in issue in Sub-Prime was entered into after the onset of COVID-19 and so could not truly be considered an intervening event. It was an event that must have been in the contemplation of both contracting parties.
[31] I agree with Mr. Lee to a point. He is right that the case at bar, as well as the Bank of Montreal and RBC cases, all involve lending agreements entered into before COVID-19 was ever heard of. But in Sub-Prime, Stinson J. identified three bases for concluding that the doctrine of frustration did not apply: (1) the pandemic was not a supervening event, but was contemplated by the parties at the time of the settlement; (2) the pandemic did not render the contract substantially different from the one which the parties had executed; and (3) the pandemic had not precluded the responding parties from obtaining financing. Any of these grounds undermined the defence of frustration. See Sub-Prime Mortgage Corporation v. Kaweesa, 2021 ONCA 215 at para. 26.
[32] There have been, as I have set out, at least three cases, emanating from this court, that have held that the COVID-19 pandemic was not an event that rendered commercial loan agreements substantially different than the contracts entered into. Said another way, at least three of my judicial colleagues on this court have already concluded that the impact of the COVID-19 pandemic is not a sufficient intervening event to support the application of the doctrine of frustration to commercial lending agreements. The doctrine of stare decisis compels me to follow those decisions unless I am satisfied that they are clearly wrong. See R. v. Sullivan, 2022 SCC 19. I am not satisfied that they are clearly wrong and, indeed, agree with them.
[33] The court, like all Ontarians, is not unsympathetic to the situation that many small business operators – particularly restaurants – found themselves in as a result of the impact of the pandemic and the lockdowns imposed by the legislature and local health authorities. But in my view, the onset of the COVID-19 pandemic did not undermine the fundamental framework within which the lending agreements between the parties were struck, in such a way as to outweigh the values favouring enforcement of the terms of those agreements.
[34] In the result, I find that the doctrine of frustration does not aid the defendants in this case. There is no genuine issue here that requires a trial. Summary judgment will issue in favour of the plaintiff for the balances outstanding on the loans, as set out above.
[35] The plaintiff seeks its costs of the motion and the proceeding on a partial indemnity basis. The plaintiff has been successful and by convention is entitled to its costs on the basis sought. A costs outline was filed, which reflects fees, on a partial indemnity scale, of $7,763.50 plus disbursements of $863.29 plus HST. I am satisfied that the amounts claimed are fair and reasonable in all the circumstances. I fix costs at $9,500 all-inclusive.
C. Boswell J.
Date: July 14, 2022